Thursday, January 5, 2017

Year End Review 2016: After Four Full Years of Retirement

This coming May 2017, it will be five full years since my husband Rich and I simultaneously retired at age 48.  They say that time flies when you are having fun and that has certainly been true for us.  We have had a blast in the past 4.5 years (other than during my brief period recovering from health issues) and we have never encountered a dull moment when we felt bored or wondered what we could do next.  In fact, we have been so busy that we need to prioritize our interests.  We have settled into a routine where our fall and winter days are filled with indoor tennis, interest courses at U of T's Innis College, attending live theatre including our annual subscription to Mirvish Productions, trips to the Art Gallery of Ontario and other museums, as well as visiting or entertaining friends and family. We are so busy during this period that we don't have time to travel, which works out fine for us since we are not keen on "sun vacations".  Instead, we have been taking 4-7 weeks of vacation each year during the spring and summer, continuing to take advantage of the financial and cultural perks of home swapping.  Each year I think that we may not find a new swap opportunity, when out of the blue, another great offer arises.  Since retiring, we have traveled via home swap to the South of France, all around Ireland, Amsterdam, Venice and Paris.  This coming spring, we will be doing a two week swap in Antwerp, Belgium with side trips to Bruges, Ghent and Brussels.

So from an emotional and social perspective, we have no regrets regarding our early retirement and cannot conceive of ever wanting to work again.  We are just having too much fun enjoying our freedom and the luxury of time!  Now for a review of how we are doing financially, to ensure that we will not be "forced economically" to go rejoin the workforce in the future.

2015 was a tough year for the TSX, which lost 11% of its value relative to the previous year.  The value of our portfolio after dividend payouts ended the year at just about the same amount as the start of the year, which meant that excluding dividends, our portfolio was down just over 2%.  This was actually a good result for us when compared to the performance of the market as a whole.  More importantly, in spite of the across-the-board hit to stock prices, the total dividends paid from our stocks still increased by 8%.  Since our retirement income strategy (as described in our book Retired at 48 - One Couple's Journey to a Pensionless Retirement) relies primarily on these dividends, in effect, we received a pay raise in 2015 despite the poor year.

By contrast, 2016 was a tremendous year for the TSX, resulting in a gain of over 22% from the previous year.  Our portfolio matched this performance almost exactly, up 24.5% including dividends and 21.66% after removing our dividends for income.  Just as we were not too concerned with the decline in value of our stocks in 2015, we are not overly excited in what might be a transient increase in 2016.  As always, our focus is on the dividends which once again increased by 8% relative to the previous year.  There are signs of concern though since for the first time since we started investing in equities, two of our stocks (Husky Energy/HSE.T and HNZ Group/HSZ.T) actually eliminated their dividend causing their share prices to plummet, while two other stocks (Enbridge Income Fund/ENF.T and Corus Entertainment/CJR.B) failed to raise their dividend for the first time in over 5 years.  Is this a harbinger for a slow-down in the rate of dividend growth in Canadian stocks for the coming year(s?).  That would fall in line with the forecasts from multiple US market sources throughout 2016 regarding dividend growth slow-down in US stocks due to a corresponding slow-down in earnings.  Luckily our dividends have risen 34% since our retirement in 2012, so we are far enough ahead of the game to be able to withstand even an extended period of slower growth.  It is interesting to note that the dividends did better in the bad TSX growth year in 2015 than the good one in 2016.  Perhaps there is a time delay in reaction to the previous year's results?

While we withdraw just about all of the dividends from our non-registered account to use as income, we only withdraw the legislated minimum from our RRIFs.  Until we reach age 71, the minimum is calculated by the formula (1 / 90-age in current year) * Balance of RRIF on Dec 31 of previous year.  The government's intent is for the dollar amount of the minimum RRIF withdrawal to increase each year to provide an income amount that accounts for inflation.   This did not happen in 2016, since our 2015 ending RRIF values were actually lower than the previous year.  As a result, my RRIF minimum in 2016 was $28 less than 2015!   This situation has reversed itself with the huge stock value gains of 2016, resulting in my 2017 RRIF minimum increasing by 14% over the previous year.

For the most part, our discretionary expenses (entertainment, travel, dining) came in around the same levels as last year.  On the other hand, mandatory expenses climbed higher than the rate of inflation with electricity costs rising 23%, condo fees up 4%, and groceries up 9%.  But all that was a drop in the bucket compared to the huge, one-time unexpected expense that we learned about last year—this was the need to replace defective Kitec pipes in our condo.  While we had over 6 months warning to save up some money, the $13,000+ final bill still put a dent in our long-term emergency kitty fund.  We will need to slowly rebuild this kitty in 2017 and hope that no new major unexpected expenses arise this year.  So far since our retirement, we have been able to live off of our annual dividends plus our emergency cash funds without requiring to dip into our capital.  Having a healthy emergency kitty helps us prolong this goal.

All along, we have been monitoring the distributed value of our equities portfolio in terms of market capitalization and diversification of business sectors as a means of reducing risk.  Our goal was to not have too large a percentage of our holdings in any one sector, or in small-cap companies.  With this year's annual review, we have started keeping track of the same distributions in terms our dividends.  We wanted to make sure that our dividends are not stacked towards one sector such as oil and gas, where the industry as a whole might go through a rough patch, increasing the potential of companies lowering or stopping their dividend payouts.  We are fairly satisfied with the results of this exercise as we saw that most of our dividends come from large and mid cap companies and are reasonably spread out across the sectors.  Our percentage of small-cap holdings have shrunk over the past year, as several former small-cap companies have grown to the point where they are now categorized as mid-cap.

For this year's review, I finally hunkered down and did the calculations to determine the answer to a question that I have been wondering about since we retired.  It relates to when to start taking our CPP payments.  The government has put a heavy penalty of 6% per year for taking CPP earlier than age 65.  But the calculation of my annual CPP retirement benefit is also impacted by the number of years where I did not max out on CPP contributions, between age 18 and the year I start taking CPP.  Obviously once I retired at age 48, I stopped making any CPP contributions since I no longer generated any earned income.  So what would hurt me more, my growing number of years of zero CPP contribution or the penalty for taking CPP early?  If I took my CPP at age 60, I would save myself 5 additional zero years, but would this be worth it to offset the penalty of starting CPP early?

It is a long, convoluted calculation to determine what my CPP retirement benefits would be if I started taking them at age 60 vs 65 vs 70.  I followed the instructions of this Retire Happy Blog which walked me through the steps, creating a new spreadsheet (I love spreadsheets!) to guide me.  I'm not sure I have all the details exactly correct, but I completed enough of the the exercise to answer my question.   Although I would definitely receive less than the maximum possible CPP benefits due to my 17 extra years of retiring early and not contributing, I was still better off waiting until age 65 or later to take CPP, assuming I don't need the money earlier.  The impact of my elevated number of years of zero CPP contributions became inconsequential relative to the massive penalty of taking CPP early.  This is what I always suspected the results would be, but it was definitely interesting to definitively prove it.

Comparing our 2016 year end total against our original retirement plan, we continue to trend significantly ahead of plan and are well positioned to live out our retirement years without running out of money.  Thank goodness, since I have no intention of ever going back to work.  That would be no fun at all!

2015 Year End Review
2014 Year End Review
2013 Year End Review
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